By Susan Taylor, Solarina Ho and Andrea Hopkins
TORONTO (Reuters) - Target Stores Inc's problems in Canada may have started with its first step: deciding to occupy the premises of a failed discount chain that didn't have the panache Canadians anticipated they would find in a retailer renowned for its "cheap chic."
Target, which ousted chairman and chief executive Gregg Steinhafel this week after a massive data breach shook the confidence of its U.S. customers and hurt its sales, also reported an almost $1 billion 2013 operating loss by its Canadian stores. Target, which opened 124 stores in Canada in 2013 - compared with just 15 in the U.S. - built them on the bones of the now defunct Zellers chain, whose store leases it bought in 2011 for $1.8 billion.
Trouble with that was, the stores were often smaller than those in the United States, and found in down-market malls rather than up-and-coming retail destinations. Some analysts said that Target's Canadian woes began with that footprint, while the company's inability to stock the stores with items Canadians want at the prices they expected is what ultimately alienated customers.
"Canadians were expecting the U.S. Target experience," said Doug Stephens, president of Retail Prophet Consultants in Toronto. "Instead they got Zellers with lipstick."
Canadian shoppers also complain that prices are higher than they thought they would be, that there's inadequate selection of goods on the shelves, and that the company's supply chains don't meet the expectations drummed up by its advertising.
"For Target, every time they have something on sale in the flyer, they don't have it when you get to the store," said Katie Witzell, 31, who was shopping at a Toronto Wal-Mart with her toddler.
Toronto interior designer Christine Tavares, 40, shopping at a Target store where some shelves were oddly barren of merchandise, said, "I was here within the first week when it opened, and I was so disappointed. The shelves were empty. We were expecting what we saw in the States."
It won't be easy for Target to sweeten the sour first impression it has made on Canadian shoppers, who were familiar with the retailer's U.S. stores and expected more selection and better prices.
"They over-promised and under-delivered and they're wearing two big shiners for it," said Jim Danahy, chief executive of consultancy CustomerLAB and director of the Centre for Retail Leadership at York University's Schulich School of Business.
Target says it's working on the problems, though fixing them may take time.
"Again, it's not done, it's not perfect, and it's not everyday,'' said Eric Hausman, a Target spokesman. "On any given day, in any given time, we think it's incrementally better than it was several weeks ago, several months ago and that's what we're looking for."
Investment management firm Esplanade Capital sold most of its Target shares in recent months because of the data breach and the Canada problem, said Shawn Kravetz, president of the Boston-based firm.
"The losses to get there, the capital expenditures to get there, the time to get there will be a hit to earnings for some time and the upside is more modest and further in the future," Kravetz said.
The company expects $300 million to $400 million in capital spending in Canada this year, down from the peak of more than $1 billion in 2013, to fix the stores, John Mulligan, Target's former chief financial officer and now interim chief executive, said in February. Mulligan said last year that the stores were in very poor condition, with $10 million to $11 million in renovations expected for each location.
It's an investment that may yet pay off with customers who laud the clean stores and customer service they are used to in the U.S.
"I settle for a few items that I can get here rather than go somewhere else like Wal-Mart," said Raeanna Guitard, a little person who needs help reaching high shelves, as she shopped at a Target in Toronto. "I won't go to Wal-Mart unless I need to. It's unorganized and no one can ever assist me."
But Guitard, a government worker, also still shops at Target in the United States once a month, saying the furniture, clothing and household selection is better than it is in Canada.
Canadians are used to paying more for goods than in the U.S. and the disparity is more or less tolerated. It is often blamed on currency fluctuations, taxes, tariffs and transportation costs.
Target said last March that some products would have price parity with the United States and others could be higher, but still competitive with the local market.
Hani Shabbir, 26, a stay-at-home mother of two, shopping with her infant son, said she likes Target because it is conveniently located and has good products, but she finds the shelves are often empty.
"This one is more expensive. Also, there are a lot of people near here, so you have to be the first to grab things, if you're late you'll miss it, it's gone," she said. "My son has colic, and we need gripe water, and it's never in stock. It has been three weeks, and there is no gripe water -- we want the right kind. We end up running all over looking for it, and come back here a few times but it is never in stock."
Like many companies expanding into Canada, Target underestimated the complexity of the market and geography, said Bill Simpson, president of Supply Chain Systems, a consulting firm specializing in supply chain performance.
"They completely overestimated the sales that they were going to generate in Canada," said Simpson, whose company's clients include retailer Hudson's Bay (HBC.TO) and grocer Loblaw
"Forecasting - that's the root of all evil in retail. If you get a lousy forecast, if you are a demand-driven organization like Target is, if you get that wrong, you're screwed."
Still, there is hope fashionistas drawn by Target's reputation as a treasure trove for fun, cheap clothes and higher-quality merchandise than Wal-Mart may extend their patience a little longer. It's just up to Target to deliver.
Katie Witzell, the Wal-Mart shopper, said she gave Target five or six tries when it first opened, and may give it another.
"The only thing I like at Target, why I may go back, is their sheets," she said. "They do have good quality bedding."
(Additional reporting by Phil Wahba in New York. Editing by Jeffrey Hodgson and John Pickering)